Article No. 283

Business Practice Findings, by James Larsen, Ph.D.

Cutthroat Cooperation

New finding provides guidance for improving compensation systems.

There are times in the lives of many business owners when a greater focus on accuracy seems like a good idea. For example, you discover that your crew has used the wrong piping and installed 100 yards of sewer line thatís too small. A bin of defective parts waiting for rework has been mistakenly installed, and now you have an unknown number of finished units packaged and ready to ship that will fail when they are used. Steel which failed your test for strength was not returned but mistakenly used, and cranes leaving your factory this week could fail in the field and kill people. These are problems you donít need.

Then there are other times in the lives of many business owners when a greater focus on speed seems like a good idea. For example, you find the line at the cash register stretching out the door, and newly arriving customers walk away when they see it. A big manufacturing order comes with a deadline and penalties for late delivery that will eliminate any profit on the order. You go to a trade show and see a competitor displaying a prototype of a product you have in development. These are also problems you donít need.

Now the first response that comes to mind may be hysteria: screaming, waving your arms, spraying saliva with agitated abandon as you reflect on the errors of your employees to any and all who will listen to you, but after you settle down a little, you might be interested in what management experts recommend.

The experts will remind you of two management principles: 1) if itís important, measure it, and 2) if itís important, reward it. Then they would offer this advice. To increase speed, measure the time it takes to complete important tasks and then individually reward people on the basis of this measurement. To reduce mistakes and improve quality, count errors and then reward teams or work groups on the basis of this measurement.

In the example of the large manufacturing order with the looming deadline and penalties for late delivery, a piece-rate of pay would encourage your fastest workers to turn on the speed. In the example of the assembly department that mistakenly installed faulty components, a group-level pay rate based on rejects, returns, and rework would encourage teams to communicate about problems before products go out the door.

On this last piece of advice, to shift reward strategies depending upon your circumstances, Michael Johnson, from Michigan State University, had grave doubts, so he conducted an experiment to see how people actually react to changes in compensation strategies. His doubts were justified.

In his experiments, people who had been rewarded for accuracy and quality developed habits of frequent communication. When something didnít seem right, they spoke up. When these people were shifted to a new compensation system, one that rewarded speed, they had no trouble with the change. They paid attention to speed and didnít worry about passing on information.

Conversely, people who had been rewarded for speed developed habits of withholding information from co-workers. They felt more competitive, and they didnít feel inclined to help their co-workers. When these people were shifted to a compensation system that rewarded accuracy and quality, they had difficulty. They carried on with their old habits of withholding information, and accuracy and quality continued to be a problem. Johnson called it cutthroat cooperation.

The difference between the two shifts was striking. People shifting to a competitive reward structure did fine. People shifting to a cooperative reward structure didnít.

Johnson has this advice for us. Most firms have varying needs for speed and accuracy, so itís best to encourage both. We should implement hybrid compensation systems, he says, that measure and reward both speed and accuracy. For example, a factory could use a competitive piece rate for individuals and bonuses based on returns, rework, and rejects for work teams or departments.

Such hybrid compensation systems should be the norm, he says, so we can easily shift emphases as our needs dictate, but we should be careful to structure them correctly: individual, competitive rewards for speed, and team-level, cooperative rewards for accuracy / quality. When individual measurements for speed arenít feasible, Johnson recommends an individual-level base pay combined with group-level bonuses for accuracy / quality.